CIFI Holdings (Group) Co. Ltd. Upgraded To 'BB' On Improving Scale And Diversity; Outlook Stable

  • We view that CIFI Holdings (Group) Co. Ltd. has significantly improved its scale of contracted sales and geographical diversity. The company has also solidified its position within the top 15 developers in China.
  • We expect CIFI will continue its expansion momentum with no material increase in leverage, but we also forecast its margin to edge down mildly given a high base and a challenging property market.
  • On March 15, 2019, S&P Global Ratings raised its long-term issuer credit rating on CIFI to 'BB' from 'BB-' and its long-term issue rating on the China-based developer's outstanding senior unsecured notes to 'BB-' from 'B+'.
  • The stable outlook reflects our expectation that CIFI will continue to expand its sales scale with controllable leverage such that its see-through debt-to-EBITDA ratio after proportionally consolidating joint ventures (JVs) is likely to be 5.0x-5.5x in the next 12-18 months.
HONG KONG (S&P Global Ratings) March 15, 2019--S&P Global Ratings today took 
the rating actions listed above. We upgraded CIFI because the company has 
significantly improved its diversity and scale in the past two to three years. 
We expect the company to continue its expansion momentum with controllable 
leverage, although its margin will likely trend down mildly. 

We believe CIFI will continue to expand its scale of contracted sales but at a 
more moderate pace. In our projection, its 2019 contracted sales will increase 
to almost Chinese renminbi (RMB) 190 billion, representing 25% growth. We see 
the 9% year–over-year decline in the first two months' sales in 2019 to be 
temporary. The decline is also due to fewer new project launches. We believe 
CIFI's 2019 target is attainable based on nearly RMB350 billion sellable 
resources for the year.

In our view, CIFI has achieved significantly better geographical diversity and 
scale improvement. We expect the company to continue strengthening its market 
position in existing cities, after entering into more than 30 new cities in 
the past three years. In 2018, CIFI's contracted sales came from 44 cities, 
compared with only 28 cities the year before. More importantly, contribution 
from the Yangtze Delta Region has further reduced to 48%, versus 62% in 2017, 
while Central Western's contribution increased to 23% from 14% previously. 

We expect CIFI to continue to expand using a JV model in 2019 and 2020 but 
gradually lower its reliance on the model, thanks to its improving brand and 
more established presence in new cities. In particular, the attributable ratio 
for land acquisitions has increased to 54% in 2018 and over 90% in first two 
months of 2019, versus 41% in 2017. Therefore, CIFI's attributable sales 
should increase but it will be a gradual process since many existing projects 
are still JVs. 

Despite a mild margin correction, CIFI is likely to have strong revenue growth 
in 2019, given strong sales performance in 2018. If we add back inventory 
revaluation costs when acquiring certain JV projects in 2018, CIFI's adjusted 
gross margin improved to 34.7% from 2017's 29.7%. However, we expect 
contracted sales margin in 2018 to have been mildly squeezed given lower 
prices recorded last year--RMB15,900 per square meter (sqm), compared with 
RMB16,500/ sqm. in 2017. 

In our assessment, CIFI has a stronger credit profile than its 'BB-' rated 
peers, in terms of scale and diversity, and is becoming more comparable to the 
'BB' rated peers such as Future Land Development Holdings Ltd. and Agile Group 
Holdings Ltd. We therefore raised our rating on CIFI by one notch by assessing 
its comparable rating analysis as positive. CIFI also demonstrates better 
funding competitiveness with average interest cost at 5.8% in 2018. The low 
funding cost not only demonstrates good capital market standing but also 
reflects CIFI's good financial management, including an even maturity profile 
with only 17% of debt being short-term. 

The stable outlook reflects our expectation that CIFI will continue to expand 
its scale of sales with leverage staying under control in the next 12-18 
months. We forecast the company's see-through debt-to-EBITDA ratio after 
proportionally consolidating JVs to be 5.0x-5.5x.

We may lower the rating if CIFI's sales and delivery execution is weaker than 
we expect or debt-funded expansion is more aggressive than we anticipate, such 
that the company's consolidated debt-to-EBITDA ratio rises above 6.0x or 
see-through debt-to-EBITDA ratio increases above 5.5x for an extended period.

Although rating upside is limited in the next 12 months, we could upgrade CIFI 
if the company continues its strong sales growth momentum with further 
increase in attributable ratio such that its consolidated and see-through 
debt-to-EBITDA ratio declines toward 4x on a sustainable basis.

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